Budget 2018: Proposals would definitely be compelling given that they come just before elections year

Budget 2018: Every Budget brings along with it different hopes and expectations, which get expressed in the form of demands from various sections. At another level, the critics pontificate on the wisdom of having fiscal targets that always move downwards, which helps to discipline the government.

Budget 2018: An early Budget, as we are having since 2017, has the advantage of cutting the tape and allowing for the government to start spending money from April onwards, which gives enough room to implement cogent policies.

Budget 2018: Every Budget brings along with it different hopes and expectations, which get expressed in the form of demands from various sections. At another level, the critics pontificate on the wisdom of having fiscal targets that always move downwards, which helps to discipline the government. Those with a socialist proclivity forcefully argue for higher allocations for social schemes, but everyone agrees that the government should be aggressive on capital expenditure. This time, however, more than the budgetary proposals, the outcome on various themes focused in Budget 2017-18 would evoke considerable interest. An early Budget, as we are having since 2017, has the advantage of cutting the tape and allowing for the government to start spending money from April onwards, which gives enough room to implement cogent policies. But, conversely, having the Budget 2018 on February 1 makes the revised numbers presented by the government for the previous year more nebulous as we are literally conjecturing a lot for two months of the future (more reasonably speaking, three months, as often detailed information for January would not be available when these numbers are tabled). Therefore, the final numbers are more likely to deviate from the revised estimates. Yet certain numbers would be of interest.

First, the income tax revenue would indicate whether or not collections are increasing on account of an enhanced number of assesses (which was stated to be around 25% higher than earlier). This is so because it has been stated that the number of taxpayers has increased after demonetisation, which was to improve future collections. Therefore, if the tax payable by them was significant, then the numbers should get reflected in income tax collections, as the immediate impact of such a reform should be the maximum in the t+1 year. The Budget had assumed a slightly higher growth of 25% in income tax collections as against 22% in FY17. As GDP growth is to be lower this year, any increase in this rate could be attributed to a higher base of taxpayers.

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Second, the indirect tax collections would also elicit scrutiny considering that this is the first year of GST. The Budget had not put down the numbers for this reform on February 1, 2017, though there was acknowledgement that GST would be brought in from July 1, 2017. In fact, in terms of growth in collections, both excise and service tax collections were to grow at lower rates compared with FY17. The numbers so far on indirect tax collections have been volatile, given the readjustments made in production cycles of producers as well as GST rates. Since states have to be compensated as per statute, the net flows to the central government would be known as well as the final surplus or shortfall on this score.

Third, some revenue slippages, which appear to be, prima facie, possible on account of developments in the first nine months, would also be clear. These refer to the non-tax receipts which include both dividend/surplus from PSUs including RBI and telecom spectrum sale. The government was supposedly exploring the possibility of getting RBI to transfer some cash balances of the central bank as well as getting PSUs to pay higher dividends. If the budgeted numbers are retained, then it could be assumed that there would be announcements on both soon, which is useful for the markets.

Fourth, there has been an announcement made already on recapitalisation of banks in FY18. A sum of Rs 1.35 lakh crore is to be issued as recap bonds, though the mechanics have not been clearly spelt out. While it is not clear whether or not the entire sum would be issued in this fiscal, the point of interest would be the accounting of the same. The questions raised are: Who would be subscribing to these bonds? Will the proceeds be put in as equity or debt (AT1 bonds) in the banks? Will this amount be included in the fiscal deficit definition or will it be considered to be above the line and excluded?

Fifth, there has been some speculation on whether or not the government would be adhering to the capex targets put in the Budget 2018.Interestingly, so far this year, investment in the country has been driven largely by the central government, which had been on target so far. Of the Rs 3.1 lakh crore budgeted for the year, around 60% was incurred up to November. Therefore, the revised figures would answer the question on whether or not any compromise is being made on this account.

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Sixth, the final disinvestment target for the year would be known. This year has been good for the government, with around Rs 54,000 crore of the Rs 72,500 crore target being achieved. This has been possible due to a combination of a determined drive of the government to push forward this programme, assisted considerably by an ebullient stock market, which has spread happiness all year long. Under these conditions, the government could also extend the frontier to beyond this mark, which will help to balance the Budget 2018.

Seventh, the overall fiscal deficit number will be the major takeaway as it would close the debate which is there today on what the number will be like. When the announcement was made that the government would be borrowing another Rs 50,000 crore, it did mean that there would be a shortfall of this amount which was to be fixed through this route. Hence, the deficit under ceteris paribus conditions would be approximately 9% of the budgeted number, which would translate to 3.5% of GDP. Also, with the GDP advance estimates speaking of a lower growth number, the 3.2% target looks unlikely to be met. This, in turn, will also tell us what the approach to the FRBM is likely to be, as the earlier stated goal of strictly moving to the 3% mark in FY19 may not be easy. While the proposals for the coming year would definitely be compelling given that they come just before the elections year, the revised estimates would tell us more on the state of the economy and the impact of reforms on the state of finances of the government. In a way, it will be a judgment on fiscal management and the impact or repercussions of reforms introduced in the last 15 months or so.